It is common to want to ‘give back’ to those in need, especially if we have family that is struggling and we have built up a healthy savings account. It is important, however, to think before we act, and to understand that there are important differences between lending money as an investment, and doing so to help out family or friends in need. While our instinct will probably be to rush out to help, it is vital to think calmly about the best way to lighten our loved one’s financial burden.
Loans Can Change the Nature of Relationships
Those who borrow a significant amount of money can find that suddenly, the relationship with the borrower is no longer on even ground. That is, the borrower may feel so grateful/literally indebted, that family mechanics change, which can be detrimental to both parties.
Being on equal footing is important if we are to be honest, resolve conflicts productively, and work towards common goals. Think of how lending money might change that.
Lack of Guarantees and Loss of Interest
When we lend money to family or friends, we don’t normally go the legal route by asking for guarantees. This can lead to problems if we need the money to be paid back to restore or maintain a good credit score.
Financial situations can have many ups and downs, and you may find that you yourself are in indebted, and need the money you have lent family, to get you out of your current bind.
As noted by AAA CreditGuide (https://aaacreditguide.com), items such as charge offs, collections, and late payments impact your credit score negatively, and can stop you from buying a home, starting a business, or otherwise purchasing bigger items you need for your home or your profession. Even those who are well off can suffer from having no official avenue to collect debt from family and friends, since they may have intended to apply the amount lent to future investments and they may lose a significant amount of interest from debts which take too long to be paid.
You May be Enabling Poor Financial Habits
Making wise financial decisions is important throughout life; by being too quick to ‘cover financial holes’, you can prevent your family members from learning vital life skills, including being responsible with money, reducing reliance on credit, and learning to save.
What are the Alternatives?
Helping out loved ones is a laudable desire that you can always accomplish in ways other than loans. One of the best ways to help children, for instance, is by investing in a college fund/their education.
Another is to give monetary gifts occasionally. When you do, make clear that you do not need to be paid back; if they do decide to reimburse you in the future, all the better, but if not, your good relationship will be preserved.
Most importantly, a gift brings no expectations; you will not have to make regular payments or give more than you can.
Even those who earn good salaries or who save regularly should carefully consider the implications of lending money to people they love. Our relationships are the most important things we have in life, yet when money gets in the way, expectations and dynamics can change, and there are many other ways to help loved ones financially.